Hedging Currency Risk with Forward Contracts

Medium Multinational Operations Hedging Currency Risk

A multinational corporation, XYZ Corp, operates in multiple countries and earns revenues in different currencies. Recently, the company identified that its revenues from Europe are significantly exposed to fluctuations in the Euro. To mitigate this risk, XYZ Corp is considering the use of forward contracts to hedge its currency risk associated with its European revenues.

Which of the following statements regarding the use of forward contracts for hedging currency risk is correct?

Forward contracts can only hedge against foreign currency revenue fluctuations for a limited period, typically up to one year.

Using forward contracts locks in the exchange rate for the specified amount, providing certainty on future cash flows in the company's reporting currency.

Hedging with forward contracts may result in opportunity loss if the foreign currency strengthens against the domestic currency.

Hint

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